Sweet as sugar…but bitter as bitter gourd too! The monthly recurring revenue (MRR) is the most critical metric SaaS businesses need to keep an eye on for survival. It helps you to improve constantly and depict a true potential of your business.

MRR calculations

You will arrive at the accurate MRR only after considering the components.

How components affect your MRR calculations (Very important)

Majority of the SaaS businesses have multiple pricing plans at different time periods (monthly/quarterly/yearly). Therefore, initially, all the customers will get divided into these specific plans and their payment recurrence will depend on the plans they chose.

Now, let’s see, what will be your MRR after 30 days due to the behavior of these same 100 customers and a few more.

Method 1

This is a simple addition method. Calculate MRR for each component respectively and add all the values. This makes calculations more easier and confusion-free.

Components

Number of customers

Pricing Plan

MRR per component

Upgrades

15

$150/month

$2250

Downgrades

5

$75/month

$375

Cancellations

5

$100/month

0

No-plan change Active

75

$100/month

$7500

Coupouns/Discount

20

$85/month [15% OFF on $100 plan]

$1700

New customers on $100 monthly plan

12

$100/month

$1200

New customers on $1500 annual plan

3

$1500 year ($125/month)

$375

Free Trials

15 (considered 0)

0

0

Total

Active customers = 130

Final MRR = $13400

Let’s analyze each table component now.

Upgrades

A satisfied customer is always loyal and interested in advancing his thirst for more features. In this scenario, you realize 15 out of your current 100 subscriptions have upgraded their $100 monthly plan to $150 monthly plan.

We will now calculate MRR with this impact:

Number of customers = 15 Pricing plan = $150 MRR = 15 x 150 = $2250

If we had overlooked the upgrades, our calculation could have horribly impacted the overall MRR and it would have been a disaster on a business front.

Downgrades

Downgrades signify that your business may have failed in retaining the customer at a higher plan. Or, the customer may feel satisfied with the lower plan. 5 out of 100 subscriptions downgraded their monthly plan from $100 to $75.

Number of customers = 5 Pricing plan = $75 MRR = 5 x 75 = $375

Now, if we had continued taking $100 for these 5 subscriptions, your MRR would have come as $500 which isn’t correct.

Cancellations

Apart from downgrades, another negative impact on MRR is cancellation of subscriptions. Here, you need not pay customer anything back from the next billing cycle but the customer will stop paying you.

So, if 5 customers canceled their $100 monthly plan, from next month you will not take $500 (5×100) into the MRR calculations. It will be counted as 0.

No plan change active

These are the remaining active subscriptions who neither upgrade, downgrade, cancel or refund. They stick to their current plan.

So MRR from these active subscriptions will be 75*100 = $7500.

Coupons

Let’s say you ran a 15% OFF coupon on $100 monthly plan and got 20 new active subscriptions in this 30 days. The MRR of these 20 subscriptions who availed a special discount will be-

If we had not considered the discount, the MRR could have come as $2000 (20×100) and it would have impacted the net MRR.

New customers

These are also new customers who joined this month but without availing any discount.

New customers on the monthly plan

Let’s assume you got 12 new customers at $100 monthly plan. So the MRR from these new customers will be $1200.

New customers on annual plan

Let’s assume you got 3 new customers at $1500 annual plan. So the MRR from these new customers will be (1500/12*3) = $375.

We normalized the annual plan on monthly basis. So, for the next 12 months, we’ll add $125 every month for each of these three customers.

Free Trials

Free trials should not be taken under active subscriptions. Their number will only be taken into MRR calculations when they become paid subscribers and hence, they must be excluded from MRR.

So, your final MRR comes to $13400from 130 active subscriptions.

Now, this MRR we calculated was after 30 days.

But, due to complex behaviour of customers – switch-over, churn; the MRR gets affected frequentlty or daily and hence method 2 explained below is the standard approach to calculate MRR.

Monthly Recurring Revenue formula

Net MRR = Current MRR + New MRR + Expansion MRR – Churned MRR

Method 2

In this method, we first consider the current MRR from all active subscriptions ($10000 in our case), add the additional revenue from new customers acquired and upsells; then subtract downgrades and canceled subscriptions amount to get the final MRR.

New MRR

New customers contribute directly to MRR growth. In the above example, 12 new customers purchase $100 monthly plan, 3 new customers purchased a $1500 annual plan and 20 new customers took the discounted plan. So the sum of all these three is ‘New MRR’.

New MRR = $1200 + $375 + $1700 = $3275

Expansion MRR

The revenue earned through upselling will contribute to an increased MRR. In our case, 15 customers upgraded their plan from $100 to $150. The revenue from these upsells is called as’Expansion MRR’.

Expansion MRR = 15*(150-100) = $750

Churned MRR

If some of your customers cancel their subscription in the current month or downgrade their subscription, the sum of revenue lost from them is called ‘Churned MRR’.

Not just MRR, Putler shows 15 subscription metrics like Lifetime Value, Average Revenue Paid Per User (ARPPU), Annual Run Rate (ARR), user churn rate, user growth rate, and other 110+ e-commerce metrics which can help you in strategic growth.

Mistakes some MRR tools make

There are some MRR tools that handles upgrades, downgrades properly but not coupons.

Not adding MRR value acquired via coupons to the total MRR

Treating 100% OFF coupon users as active subscriptions

Now, if these issues are not sorted, it impacts your true MRR to a great extent and shows a different picture completely.

But if you are using Putler, you need not worry about it.

Importance of calculating MRR

Enough has been discussed so far about various components of MRR calculation and its effects, now we certainly know that it is important for SaaS business to know their true MRR. We will now summarise the importance of MRR.

To track growth – MRR shows a momentum whether your revenue is picking up or slowing down

To forecast – Knowing an exact MRR helps the business to forecast future sales month by month.

To plan a budget – Like monthly recurring revenue, there are certain recurring expenses in every business, especially marketing and sales expenses. Knowing your MRR can help you create a solid budget for the upcoming months.

To boost the sales team – For any reason, if your MRR is showing a downward trend each month, you can incentivize your sales team to close more deals. It will not only boost their confidence but also increase MRR.

How to increase your MRR

Now let’s try to figure out how to improve MRR.

Increase customer retention rate

Every business constantly needs to check the customer lifetime value (CLV) to know if they are targeting the right audience and if their product meets the market demand or not? Increased customer retention rate would help in upselling/upgrading the existing customers and hence it will increase MRR.

Refine messaging

Sales and marketing team must work together to refine the product message which targets a specific group and not all sorts of audience. It must be customized and target specific which can help in generating more revenue.

Reduce customer acquisition cost

Customer acquisition cost is not taken in the MRR calculation but it indirectly helps you optimize your business. If you try to reduce the customer acquisition cost, you can use those savings in expanding your business which will inherently increase your revenue.

Are you monitoring accurate MRR?

Taking decision based on improper MRR will land your business into unexpected and risky situations which can prove fatal.

Hence, it’s important to get the right MRR which is essential to grow and make better business decisions.

And to have that MRR value without any efforts, you have Putler at your disposal.